Free exchange | Emerging markets
Predicting the next crisis
Some emerging-market economies are shakier than others
By C.W. | WILMINGTON, DE
economic impact of a strong dollar
. But what would happen if things suddenly got a lot tougher? A , from Liliana Rojas-Suarez of the Centre for Global Development, a think-tank, offers some interesting data.Let’s imagine that something really bad happens. The Federal Reserve tightens its monetary policy too soon; some new global debt crisis begins; Russia launches a full-scale invasion of Ukraine. Ms Rojas-Suarez wants to understand which emerging-market economies are most vulnerable.
To do so she creates a “resilience indicator”. The ingredients of the index are listed at the bottom of the piece. In short, the indicator measures how indebted a given country is; how reliant it is on foreign funding; and how much scope it has to fight the markets if things go wrong.
She first constructs her index for 2007. There is a reasonably strong correlation between a “good” resilience indicator and better economic performance during the subprime meltdown (see bottom chart). For instance, in 2007 Peru had a score of 0.39, thanks to a budget surplus and low external debt. From 2008 to 2010, real per-capita GDP duly grew. The Baltics, meanwhile, had much higher external debt and big current-account deficits. Their per-capita GDP dived during the crisis.
Ms Rojas-Suarez’s paper then updates the indicator for 2014 (see top chart). Lots of countries look very different. In particular, the Balts look much better. Others, though, like Poland, India and Bulgaria, look much worse. The results suggest that if there were a big financial shock, these countries would be worst hit.
* 1: current-account balance as a percentage of GDP.
2: ratio of total external debt to GDP. Both public and private debts are included.
3: ratio of short-term external debt to gross international reserves
4: ratio of general government fiscal balance to GDP.
5. ratio of government debt to GDP
6. squared value of the deviation of inflation from its announced target. (This is important, since it gives an indication of how constrained a central bank is to respond with countercyclical monetary policy.)
7: a measure of financial fragility, characterised by the presence of credit booms or busts.
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